How Can We Explain It?

The latest example of the mismatch between ideology and reality is the housing crisis. The party’s individualist model cannot explain the social contagion that caused hundreds of thousands of individuals to make bad decisions in the same direction at the same time. ~David Brooks

It could if Republicans were willing to acknowledge the role of the Fed in creating the housing bubble in the first place through low rates and cheap credit. Consumers took advantage of the conditions created by reckless monetary policy, which led to many people buying houses they could not afford and going into debt they could not repay. People were responding to incentives, as we all do, and some made poorer choices than others. Of course, probably the only thing more powerful than the cult of Palin is the cult of Greenspan, who has never done wrong, so instead let’s complain about the baneful influence of Goldwater.

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4 Responses to How Can We Explain It?

While I’m no enemy of the market, there is a tendency to ignore the obvious: massive efficiencies can be gained by a choice of someone with enough power that can dwarf the choices of thousands or even millions. While one can wax romantically about how things would have developed without China addressing their currency imbalance by purchasing massive amounts of dollar donominated mortgage backed securities, the reality is that is what happened. And you will find many on right how cheered repealing the major provisions of Glass Steagall. That deregulation (under Clinton if I recall correctly) had no small role in this. There is also the more fundamental issue that Fannie and Freddie were created to address problems that led to the Great Depression. The doctrinaire libertarian can’t handle any of this though because they see every government intervention as a way to enrich someone at the expense of someone else rather than providing the framework for an actual market to exist so as to allow the enrichment of great numbers of people while protecting the interests of the greater society.

Concerning Ron Paul’s article, I don’t disagree that the Fed, and Greenspan in particular, are the primary culprits here, but is he really claiming that there were no “booms and busts” before the creation of the Fed in 1913? That’s absurd. There were many depressions throughout the 19th century, many of them quite severe.

To lay this crisis even more clearly at the feet of Greenspan, we have to look back to see why the housing bubble occurred in the first place. It wasn’t just easy credit, it was the flight of capital away from the stock market after the previous bubble, also created in large part by Greenspan, again through an easing of credit and margin requirements in the investment market. After the collapse of the stock market, investment capital fled into the real estate market, because at the time it seemed much safer and stable. There Greenspan essentially repeated the same mistakes, easing credit and creating a capital surplus in real estate markets that drove prices artificially high, leading to a bubble collapse. So one bubble led directly to the other, both overseen and encouraged by Greenspan’s direct oversight and fed policies. One almost gets the impression that all this was intentional, another in a long series of massive thefts of capital by the world’s financial overlords.